The Economist tallies the cost of excessive land-use regulation

A couple of months ago, The Economist magazine had a cover story on “Space and the City: Poor land use in the world’s greatest cities carries a huge cost,” and I’m finally getting around to writing a complete post about this excellent piece (rather than including it in my usual lists of smaller items). It included both an opening editorial leader and an in-depth briefing article, and reiterates several of the long-term themes of both this blog and The Center for Opportunity Urbanism around the high cost of excessive land-use regulation. Since most of you may not have the time or the subscriber access to read the whole thing, here are what I think are the most key excerpts below. I realize this it is a bit long, but it just goes to show how many good points there are here:

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“…land-use regulations in the West End of London inflate the price of office space by about 800%; in Milan and Paris the rules push up prices by around 300%. Most of the enormous value captured by landowners exists because it is well-nigh impossible to build new offices to compete those profits away.

The costs of this misfiring property market are huge, mainly because of their effects on individuals. High housing prices force workers towards cheaper but less productive places. According to one study, employment in the Bay Area around San Francisco would be about five times larger than it is but for tight limits on construction. Tot up these costs in lost earnings and unrealised human potential, and the figures become dizzying. Lifting all the barriers to urban growth in America could raise the country’s GDP by between 6.5% and 13.5%, or by about $1 trillion-2 trillion. It is difficult to think of many other policies that would yield anything like that.
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San Francisco could squeeze in twice as many and remain half as dense as Manhattan.
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Zoning codes were conceived as a way to balance the social good of a growing, productive city and the private costs that growth sometimes imposes. But land-use rules have evolved into something more pernicious: a mechanism through which landowners are handed both unwarranted windfalls and the means to prevent others from exercising control over their property. Even small steps to restore a healthier balance between private and public good would yield handsome returns.
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One estimate suggests that since the 1960s such distortions have reduced America’s GDP by more than 13%.
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…in America land accounts for a third of total housing costs, and close to half in some metropolitan areas. A high share of land in housing costs results in the creation of large rents for landowners.

If regulatory limits on building heights and density were relaxed, fewer plots of land would be needed to satisfy a given level of demand. That would reduce the rents collected by landowners, since any uptick in demand could quickly be met by new development. Just as soaring agricultural productivity led to a decline in the relative economic power of rural landowners in the 19th and 20th centuries, the relaxation of strict limits on development would lead to a decline in property wealth relative to the economy as a whole. More of the gains of economic activity would flow to workers and investors.

Instead building regulations keep urban-land productivity low, and the costs are staggering. A 2005 study by Mr Glaeser and Raven Saks, of America’s Federal Reserve, and Joseph Gyourko, of the University of Pennsylvania, attempted to derive the share of property costs attributable to regulatory limits on supply. In 1998 this “shadow tax”, as they call it, was about 20% in Washington, DC, and Boston and about 50% in San Francisco and Manhattan. Matters have almost certainly got worse since then.

Similar work by Paul Cheshire and Christian Hilber, of the London School of Economics, estimated that in the early 2000s this regulatory shadow tax was roughly 300% in Milan and Paris, 450% in the City of London, and 800% in its West End. The lion’s share of the value of commercial real estate in Europe’s most economically important cities is thus attributable to rules that make building difficult.

One may find it hard to sympathise with Mayfair hedge funds facing high rents. But the net effect of these costs is felt more by the poor than by the rich. Take American homeowners. The fact that 60% of households own property might seem to suggest that rising house prices and inflated land values were good for a large swathe of the middle class. Yet Edward Wolff of New York University notes that the middle class enjoyed much less of a boost to wealth because of an accompanying rise in mortgage debt (see chart 3). Meanwhile poorer Americans, who rent their homes, experienced soaring housing prices as a large and sustained increase in their cost of living.

Housing wealth has played a critical role in rising inequality, to which Thomas Piketty, an economist at the Paris School of Economics, drew attention in his bestselling book “Capital in the Twenty-First Century”. In a recent paper Matthew Rognlie, a doctoral student at MIT, noted that the rising share of national income flowing to owners of capital, rather than workers, is largely attributable to increased payments to owners of housing. Capital income from housing accounted for just 3% of the total in 1950 but is responsible for about 10% today.
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Growth in the rents available to property owners fuels corruption and wastes resources. Landowners work to strengthen development restrictions while politicians cash in on their ability, through selective development approval, to grant fortunate supplicants a windfall. In economies where political corruption is already a problem the renaissance of land may be especially corrosive. In October 2014 the Times of India reported that the bribes required to clear the various stages of the planning-permission process in central Mumbai could add up to as much as half of basic building costs.
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…American GDP in 2009 was as much as 13.5% lower than it otherwise could have been. At current levels of output that is a cost of more than $2 trillion a year, or nearly $10,000 per person.

The good news is that the world’s urban-land scarcity is largely an artificial problem.
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Those already blessed with property may also object to the other obvious approach to the problem: faster and higher-capacity transport links allowing the benefits to be spread farther afield.”

To paraphrase Goode Co., you may want to to thank your lucky stars you live in unzoned, relatively free market Houston, Texas…